What Will COVID-19 Do to Banking?
Banks have a chance to improve their battered public image by playing a constructive role in mitigating the current economic crisis. But with COVID-19 set to accelerate the sector’s digitalization and restructuring, their future could soon become more uncertain.
BARCELONA – The COVID-19 crisis has revealed banks to be not part of the problem for a change, but part of the solution. They have so far proven to be resilient, mostly as a result of the stricter capital and liquidity requirements imposed on them following the 2007-09 global financial crisis. Today, many governments are using banks to channel funds to households and firms hit by the pandemic’s economic fallout.
Furthermore, governments have granted banks a temporary moratorium on implementing tougher regulatory and supervisory standards, in order to reduce the potential pro-cyclicality of measures introduced in the last two decades and avert a credit crunch. As a result, banks now have an opportunity to reverse the reputational damage they suffered in the financial crisis.
But they are not out of trouble, in part because the crisis will sharply increase the volume of non-performing loans. Moreover, as a recent report that I co-authored points out, the pandemic will accentuate pre-existing pressures – in particular, low interest rates and digital disruption – on bank profitability.